Italy coalition faces risk as Senate panel meets on Berlusconi

ROME (Reuters) - A special Italian Senate committee meets on Monday to consider expelling Silvio Berlusconi from parliament over his conviction for tax fraud, but may take weeks to reach a decision, delaying a showdown which could shatter the fragile ruling coalition.

Senior figures in Berlusconi's center-right People of Freedom (PDL) party have threatened to pull out of Prime Minister Enrico Letta's government if Berlusconi is stripped of his seat in the Senate.

So far, Letta's center-left Democratic Party (PD) has insisted that Berlusconi cannot remain in parliament after Italy's top court convicted him of being at the center of a vast tax fraud scheme at his Mediaset television empire.

The PDL says Berlusconi, sentenced to four years in jail, has been targeted unfairly by left-wing magistrates and accuses the PD of using judicial tactics to eliminate a rival it has been unable to defeat politically.

The process that could lead to at least temporary political exile for the 76-year-old billionaire is likely to take weeks to be completed, unless relations between the coalition partners break down into open conflict immediately.

Financial markets have been increasingly on edge as political tensions have escalated ahead of the meeting, pushing up government borrowing costs ahead of the next auction of medium-term bonds on Thursday.

The 23-member panel, which is dominated by Berlusconi adversaries, begins meeting at 3 p.m, (1300 GMT). Complicated procedural rules are likely to allow some margin for putting off a vote, allowing many days for debate.

Benedetto della Vedova, a member of the committee for former Prime Minister Mario Monti's centrist Civic Choice party, said he expected the panel to take its time to discuss some of the hotly contested legal issues surrounding the case.

With Italy struggling with a 2-trillion-euro public debt and mired in its longest recession since World War Two, business leaders warned that political turmoil could snuff out the first glimmers of a turnaround.

"Political stability is a pre-condition for economic recovery, and if there were to be a crisis, the recovery would be at risk", Federico Ghizzoni, chief executive of Unicredit, Italy's largest bank by assets, said at the weekend.

PROCEDURAL DELAYS

Angelino Alfano, party secretary of Berlusconi's PDL, declined to comment on Monday's meeting: "Saying something this morning would be seen as a provocation," he said in an interview on Berlusconi's Canale 5 television.

The center-left PD and Berlusconi's center-right PDL have been at odds ever since they were forced together into an unwilling coalition following weeks of wrangling in the wake of last February's deadlocked parliamentary elections.

However they have overcome apparently unbridgeable differences before, notably in last month's deal to scrap a deeply unpopular housing tax despite disagreement over how to fill a 4-billion-euro annual funding gap.

The committee will begin considering proposals from PDL member Andrea Augello on how to organize and schedule the proceedings, which may make clear whether or not there is any margin for a compromise.

Any sign that the PD members are pressing for a quick vote will be seen as a provocation by the PDL which wants the committee first to consider legal arguments.

Berlusconi's lawyers, who have appealed to the European Court of Human Rights, argue that the "Severino law" under which convicted politicians are ineligible for parliament, cannot apply in his case because it was passed last year, after the events over which he was convicted.

The PD has rejected calls for the committee to delay proceedings until the European Court or Italy's own constitutional court rules on the Severino law, accusing the PDL of trying to waste time with groundless appeals.

As the maneuvers continue, President Giorgio Napolitano, who has played a decisive behind-the-scenes role in Italian politics since the Berlusconi crisis erupted, may play a significant part again.

He has made it clear that he would be unwilling to call new elections and may seek to shepherd in a new coalition government if the center-right withdraws support for Letta.

Whatever the outcome of the committee meeting, Berlusconi faces months in the political wilderness, which could prevent him from standing in any election if the government falls.

His four-year jail term, commuted to one year because of his age, would also prevent his participation in national politics if elections are called this year.